I don;t know what led to the market fall on Friday and we seem to be the standalone case amongst all of our global peers. But that said, do you expect some more corrections and could that be a great buying opportunity?
Shibani Sircar Kurian: Our markets have performed extremely well in the overall context of the emerging markets and clearly from that perspective India has been a standout. My view is that the ingredients that you have seen which have driven markets so far are still fairly intact. We are in the midst of our earnings season and so far, corporate earnings delivery has been pretty much in line with expectations with most of the sectors and stocks that have reported numbers so far by and large have been in line with estimates.
So, after a long period of time, we have seen that over the last few quarters. earnings upgrades and downgrades have been pretty much in a narrow band. So, earnings have been steady. Flows continue to be strong especially on the domestic side and that is also helping. Of course, when markets outperform in a big way especially in the context of emerging markets and China, we do expect some degree of volatility.
We continue to believe that if we look at market valuations, specifically the Nifty, current multiples are slightly above long-term historic average multiples. However, it coincides with earnings growth which continues to remain strong. So, our belief is that if you look at the Nifty in terms of valuations on a one-year forward earnings basis, valuations are slightly above history but earnings are supportive and therefore it is not extremely stretched.
Within the mid and smallcap baskets, one has to be stock specific and at segments where valuations and earnings are in your favour. If you look at history, mid and smallcaps continue to trade at multiples which are significantly higher than what average valuations are. We believe that from an overall market perspective, earnings flows and macro parameters continue to remain fairly in check and therefore if you look at some degree of volatility given the past performance, it is something that is part and parcel of markets.
Earnings have been supportive but don’t you think that most of it is priced in because even if you look at this earning season, there has hardly been a surprise coming in barring a couple of names, if at all. Which sectors do you think might surprise on the upside or are poised for an upgrade from here on.
Shibani Sircar Kurian: If we look at earnings estimates at the beginning of the year and where earnings are now, the deviation has been hardly a few percentage points. So, earnings delivery has been pretty much in line with estimates. However, when you look at our earnings as well as our return ratio profile in the context of emerging markets, we continue to stand out and therefore from a relative basis, we believe that ROE profile of Indian markets as well as earnings profile continues to remain fairly healthy.
In terms of sectors and delivery what we have seen so far where there have been earnings ahead of estimates, a few sectors come to mind. One, cement earnings delivery from the companies that have reported numbers so far have been slightly ahead of estimates. Autos which have delivered numbers and even in the auto ancillary space, the numbers have been fairly healthy and maybe slightly ahead of estimates.
Now if we look at the earning season so far, the bulk of earning has come in from the BFSI space and technology. Technology has had a muted quarter, but even in the BFSI space, one standout for me has been that contrary to fears of continued sharp decline in net interest margin for banks, margins have held up fairly steady. Banks are now seeing better deposit trajectory which means that the liability franchise is also improving and that bodes well from a balance sheet perspective. So, while overall earnings have been in line with estimates, continued delivery of mid- to high-teens earnings growth for the next two years, bodes well for the market.
We are yet to hear from Britannia, Unilever, etc, but going by Dabur’s reading, the green shoots are pretty much there in FMCG and maybe this is the pocket to bet on?
Shibani Sircar Kurian: For the entire consumer segment, we have seen a K-shaped recovery where the premium segment continues to be ahead of the mass segment. However, at the margin, the data suggests that there are some initial green shoots of recovery coming through. However, it is not likely to be a very sharp recovery. It is going to be more likely a very slow and steady recovery.
A few data points that we have been tracking here, apart from the commentary that is coming through from some of the companies that are reporting numbers, one is that the expectation is that this year will be a normal monsoon year and that means that going into the second half of the year if the kharif output is good, we will possibly see some recovery take place where rural income is concerned.
If you look at the data in terms of real rural wages over the last four-five years, the number has been largely flat and therefore that is clearly what has impacted mass consumption, whether it be in various categories and segments that you are talking about.
The second factor that we are tracking is the demand for MGNREGA jobs and that demand seems to have come off somewhat.
The third factor is that infrastructure related activity would likely pick up post elections, which means again, job creation where the entire segment is concerned on the infra side should also help support wages, especially at the lower end segments and rural wages. All these data sets seem to point that maybe we are at the bottom, whether we have recovered or whether there is a sharp recovery that is underway, the answer is still no, but we would expect that going into the second half of the year, some green shoots of recovery should be seen in mass consumption and FMCG segment.
The logistics stocks have not done much. Adani Ports business seems very strong but the stock has not done much after that entire fiasco and the recovery post that. Considering JSW Infrastructure, other logistics names like Blue Dart, etc, what is your view in terms of investable ideas within that space?
Shibani Sircar Kurian: We are fairly positive on this space. We believe that if you look at the overall growth of the economy, the sector is very closely correlated to the growth and our expectation is that the economy would continue to grow from here on.
In terms of the overall infrastructure specifically with the kind of investments that have been made in terms of building roads as well as even in terms of the DFC getting commission, the overall sector should start seeing improvement in terms of growth. Yes, so far, we have seen muted numbers that have come through, but expectations remain that from here on as the economic growth continues this is a sector where we believe that the numbers should start to come through especially where volume growth is concerned.
On the export side, there has been some impact because of the global slowdown. However, incrementally as things start to kind of settle down, we should start seeing overall improvement. This is a segment where on a stock specific basis, there could be opportunities.